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2014 (6) TMI 185 - HC - Income TaxDisallowance u/s 14A r.w. Rule 8D of the Act - Bifurcation of expenses Held that - The assessee was having shareholding funds and the investment - the assessee had sufficient funds for making the investments and it has not used the borrowed funds - there is nothing on record to indicate that there has been any actual expenditure incurred by the assessee for earning tax-free income of ₹ 14 crores Relying upon CIT v. Suzlon Energy Ltd. 2013 (7) TMI 697 - GUJARAT HIGH COURT - the Tribunal has rightly bifurcated the expenditure in two parts-first related to investment in foreign subsidiaries - the dividend income from such subsidiaries is taxable in India and that therefore, section 14A would have no applicability - The remaining amount pertain to investment of ₹ 38 crores-(rounded off) made in Indian subsidiaries - the assessee had to its disposal, own interest-free funds many times over the investment - it clearly emerges from the material on record that no expenditure was incurred for earning the exempted income and that being the question of fact, the disallowance of 1 percent of interest expenditure artificially or on the basis of assumption rightly has not been sustained by the Tribunal Decided against Revenue.
Issues Involved:
1. Whether the Income-tax Appellate Tribunal erred in law by deleting the disallowance made under section 14A of the Income-tax Act. 2. Whether the provisions of rule 8D were applicable prospectively or retrospectively. 3. Whether the Assessing Officer is empowered to make disallowance under section 14A by bifurcating the expenditure towards earning taxable and exempt income in the absence of rule 8D. Issue-wise Detailed Analysis: Issue 1: Deleting Disallowance under Section 14A The Revenue challenged the Tribunal's decision to delete the disallowance made by the Assessing Officer under section 14A. The assessee had shown significant exempt income and claimed no expenditure was incurred towards earning this income. The Assessing Officer disallowed Rs. 43.47 lakhs under section 14A, attributing a portion of interest and administrative expenses to the earning of exempt income. The Commissioner of Income-tax (Appeals) upheld and enhanced this disallowance. However, the Tribunal held that the disallowance of 1% of interest expenses was not sustainable as the Assessing Officer did not pinpoint any specific expenditure incurred for earning the exempt income. The Tribunal relied on the Delhi High Court's decision in Maxopp Investments Ltd. v. CIT and concluded that no disallowance could be made by applying rule 8D for the assessment year 2006-07. Issue 2: Applicability of Rule 8D The Tribunal ruled that rule 8D of the Income-tax Rules, which prescribes the method for computing disallowance under section 14A, is applicable prospectively from the assessment year 2008-09. This was in line with the Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT. The Tribunal noted that for the assessment year 2006-07, the provisions of rule 8D could not be applied retrospectively. The Gujarat High Court upheld this view, referencing its own decisions in CIT v. Suzlon Energy Ltd. and CIT v. UTI Bank Ltd., which supported the prospective application of rule 8D. Issue 3: Assessing Officer's Empowerment in Absence of Rule 8D The High Court addressed whether the Assessing Officer could make disallowance under section 14A by bifurcating the expenditure in a reasonable manner in the absence of rule 8D. The court noted that while rule 8D is not retrospective, it does not preclude the Assessing Officer from making a reasonable allocation of expenses towards earning exempt income. However, in this case, the court found no evidence of actual expenditure incurred by the assessee for earning the exempt income. The court cited its decision in CIT v. Sintex Industries Ltd., where it held that in the absence of rule 8D, disallowance could still be made by reasonable bifurcation, but only if there was evidence of expenditure incurred. Conclusion: The High Court dismissed the Revenue's appeal, holding that the Tribunal correctly deleted the disallowance under section 14A. The court affirmed that rule 8D applies prospectively from the assessment year 2008-09 and that in the absence of rule 8D, disallowance under section 14A requires evidence of actual expenditure incurred. The court found no such evidence in this case, thus supporting the Tribunal's decision to delete the disallowance.
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